The ability of clusters generated by direct foreign investment (DFI) in emerging economies to generate sustained, value-added growth is a matter of controversy. This article assesses this debate with reference to the role of Japanese electronics multinational corporations (MNCs) in the development of clusters in Malaysia. Conceptually, we present a typology of DFI-generated industrial clusters that represent increasing degrees of commitment to local value creation and upgrading. Empirically, we conducted a survey of 10 Japanese firms in Malaysia that examined whether or not their factories increased technological upgrading, increasingly embedded their operations through using local skilled labor and supply firms, and responded positively to national policies and cluster-governance measures supporting the electronics industry. We found that Japanese firms had clearly moved beyond simple assembly-based to embedded clustering but had not progressed further to technology-intensive behavior because of the poor technological environment in Malaysia, as well as Japanese MNCs' strategies that depend on technology from headquarters. Nonetheless, Japanese MNCs were sufficiently embedded in Malaysia to upgrade production to digital consumer products, and semiconductor assembly has flourished, warding off competition from China and low-cost locations in the Association of Southeast Asian Nations. At the end of the study period, Malaysia remained an attractive location for Japanese electronics MNCs.